With Federal IT budgets under constant pressure, more and more CIOs are drawn to the concept of cost chargeback, wherein IT costs are charged back to the user departments on whose behalf they were incurred. The expectation is that chargebacks limit the seemingly endless growth of IT overhead expense. Although, IT chargeback seems logical on the surface, it is not a panacea for IT spending control, and implementation is fraught with peril. Improper application of a chargeback program can have dramatic impacts on behavior, leading to duplication of IT development efforts, non-optimization of IT resources, and server and database growth, some of the very activities that IT chargeback is implemented to prevent.

Bob Svec, president of TSL, a chargeback consultancy in Parsippany, New Jersey, looks at chargeback in the context of centralization versus decentralization. Chargeback, asserts Svec, "offers the best of both worlds. You've got the efficiencies of centralization, combined with the ability to let people see what they are getting, and how much they are paying for it." Other consultants have quickly adopted chargeback and promote its value while numerous vendors, such as AcornSystems, have developed software that accurately tracks IT costs. However, many CIOs have found IT chargeback to be a political nightmare, and capturing IT costs is much more complicated and costly that it would initially appear.

There are many methods to allocate IT costs to business units. Many CIOs have found that it is difficult to allocate accurately all costs because there are many shared systems and other fundamental infrastructure components, such as security features ( i.e., firewalls and encryption/decryption devices), telecommunications hardware, switches, routers, etc. As a result, many organizations have adopted a hybrid of the various chargeback methods.

According to Project Performance Corporation, a McLean, Virginia, based consulting firm, the most common chargeback techniques include the following.

1. Non-IT-Based Chargeback: IS charges back all IT costs across various business units based on a predetermined formula.
2. IT-Based Chargeback
1. Subscription Pricing: IS charges costs back on a fixed basis, using a specific metric as a divisor for associated IT costs without regard to consumption.
2. Measured Usage: IS charges costs back based strictly on use of IT resources.
3. Direct Chargeback: All costs are charged back to the business unit that "owns" the service, regardless of usage patterns.
3. Fee-Based Chargeback
1. Tiered Flat Fee: IS charges costs back based on service-level differences.
2. Negotiated Flat Fee: IS charges costs back based on an annual study of the IT resources used by each business unit.

For any chargeback method to be effective, it must be simple, fair, predictable, and controllable-otherwise the IT chargeback program will likely fail. It also is important to note that IT chargeback in itself does not reduce IT costs; in fact, it increases costs because of the additional costs associated with maintaining the chargeback program. Therefore, it is paramount that the chargeback program be linked tightly to the overall IT strategy so that the information generated by the program changes behaviors within the organization to control overall IT costs and improve efficiency.